While allowing FDI in LLP, the Government of India, has taken a very precautionary approach by only allowing FDI under approval route in sectors where 100% FDI is allowed, under the automatic route and there are no FDI- linked performance related conditions, for example sectors like power, roads, information technology, manufacturing etc .

Please check the policy details below

a. LLPs with FDI will be allowed, through the Government approval route, in those sectors/ activities where 100% FDI is allowed, through the automatic route and there are no FDI- linked performance related conditions.
By FDI- linked performance related conditions, it is meant that in sectors, where conditions like minimum capitalization etc are prescribed like development of Townships, NBFC, even though 100% FDI is allowed under automatic route, LLP’s will not be allowed to bring FDI with the approval of Government of India.

b. LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business.

c. LLPs with FDI will not be eligible to make any downstream investments, which mean LLP having FDI, cannot make further investment in LLP or companies engaged in any business, even though 100% FDI is allowed under those sectors.

The Government of India has also prescribed the following conditions relating to funding, ownership and management of LLP’s:

I. Funding of LLPs:

(a) Downstream Investment by Company: An Indian Company, having FDI, will be permitted to make downstream investment in LLPs only if both the company, as well as the LLP is operating in sectors where 100% FDI is allowed, through the automatic route and there are no FDI- linked performance related conditions.

(b) Investment by Cash Consideration: Foreign Capital participation in the capital structure of the LLPs will be allowed only by way of cash considerations, received by inward remittance, through normal banking channels, or by debit to NRE/ FCNR account of the person concerned, maintained with an authorized dealer/authorized bank. For making non cash/intangible contribution towards the capital of the LLP, permission of Government of India will be required.

(d) External Commercial Borrowings: LLPs will also not be permitted to avail External Commercial Borrowings (ECBs.)

II. Ownership and management of LLPs:

(a) Determination of Designated Partner: The LLP Act 2008, provides that at least one designated partner shall be person resident in India.

As per explanation to section 7 of the LLP Act 2008, the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding one year.

But for the purpose of determination of the designated partners in respect of LLPs with FDI, the term “resident in India” would have the meaning, as defined for “person resident in India”, under Section 2(v) (i) (A) & (B) of the Foreign Exchange Management Act, 1999;

(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include –

(A) a person who has gone out of India or who stays outside India, in either case—

(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.

(B) a person who has come to or stays in India, in either case, otherwise than—

(a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.

(b) Body Corporate as Designated Partner: In case of LLP having FDI and a body corporate is a designated partner, than the body corporate should only be a company registered under the Companies Act and not any other body, such as an LLP or a trust.

(c) Compliance of FDI Policy: The designated partners will be responsible for compliance with the above conditions and liable for all penalties imposed on the LLP for their contravention.

(d) Conversion into LLP: Any conversion of a company with FDI into an LLP will be allowed only if the company is engaged in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions and prior approval of FIPB/ Government is obtained.

The Government of India has issued a Press Note for amending the consolidated Foreign Investment Policy in order to allow FDI in LLP, Click here http://dipp.nic.in/English/Policies/FDI_Circular_2016.pdf

Differentiate in TABULAR FORM BETWEEN COMPANY AND LLP

S. No.

Particulars

Company

Limited Liability Partnership

1

Legal status

Independent legal status

Independent legal status

2

Setting up requirements

If activities/sector fall under the ambit of the automatic route, no prior approval required but only post-facto filings to be undertaken with the RBI.

In other cases, GoI/FIPB approval required and thereafter post-facto filings required to be undertaken with RBI

Foreign investments allowed in sectors, which are under 100% automatic route with prior GOI/FIPB approval. The sectors should also not be subject to performance linked conditions

3

Permitted activities

Any activity specified in the memorandum of association of the company. Wide range of activities permitted, subject to FDI guidelines

LLP should be engaged in sectors/activities for which 100% FDI is allowed without any approal. LLP’s with foreign investment will not be eligible to make any downstream investments

4

Funding of local operations

Funding to be through equity or other forms of permitted capital infusion or borrowings (local as well as overseas as per prescribed norms) or internal accruals.

Contribution in the capital of the LLP should be through inward remittance or by debit to NRE/FCNR account of the designated partner. LLP’s are not eligible to raise ECB

5

Limitation of liability

Liability limited to the extent of equity participation in the Indian company

Liability of the partners is limited to their agreed contribution to the LLP except in case of fraud, wrongful act, etc

Required to file periodic and annual filings relating to foreign liabilities and assets, receipt of capital and issue of shares to foreign investors

Filing of FCGPR and ARF form against investment in shares by foreign body corporate.

No filing requirements prescribed as of now

8

Compliance requirements under the Income tax act

Liable to be taxed on global income at 30% plus surcharge and education cess on a net income basis. In case above tax is not applicable than Subsidiary company liable to MAT of its book profits. Dividend declared freely remittable but subject to distribution tax of 15% plus surcharge and edu. cess on dividends, pursuant to which dividend is tax free for all shareholders. Distribution tax to be paid only on amount of dividend.

Liable to be taxed on global income at 30% plus education cess on net income basis. In case above tax is not applicable then LLP liable to MAT at the rate of 18.5% plus cess of its book profits no DDT leived on profit distribution and Indian transfer pricing regulations are applicable

<9

Permanent establishment (PE)

An independent taxable entity and not a PE of the foreign company.

An independent taxable entity; however, whether interest in LLP results in PE for a foreign partner, is still an ambiguous position under LLP

10

Repatriation of funds on ongoing basis

Subsidiary does not require any approval for remittance of post-tax profits; dividends declared will be subject of distribution tax

LLP does not require any approval for remittance of post tax profits

11

Exit mechanism

Exit can be through sale of shares or winding up or liquidation

Foreign partner permitted to transfer its stake in LLP and can also dissolve the LLP

Thus, by using suitable LLPs structures, profits can be efficiently distributed to overseas parent.